Comm: Precious


Everything seems to be in boom mode right now despite the fact that markets and the economy have been decent for some time. One very positive sign for the markets is that commodities have been on the rise despite a long period in the doldrums. Metals and energy have both been doing well despite the structural issues that have plagued the sector for years. Oversupply seems to to have been quelled in oil, and inventories of various metals, such as nickel, have shrunk, leading to a price boom.

FINSUM: High demand for commodities is a very strong sign of economic expansion, so we take this as a reliable indicator that the economy may start to deliver on all the hype. Inflation to follow?

(New York)

Gold has had an interesting ride the last few years and is currently in the midst of a strong year. However, its recent performance may pale in comparison to what comes next, at least according to Barron’s. Barron’s says gold has the best risk/reward ratio of any asset class today, and that even if other asset classes keeps rising, gold investors will do well. They may really hit it big if we have another crisis, though. Additionally, fundamental factors like supply are waning, which should move the equilibrium price of gold up. The metal is up 11% so far this year.

FINSUM: Gold’s valuation certainly isn’t as lofty as many other assets classes after years of weak performance. But then again, gold’s value is so abstract it is hard to talk about valuation on a meaningful basis.

(New York)

Gold has had a good year. Up 15% through early September, it had unexpectedly risen alongside shares for solid gains this year, though it has slumped considerably since. Now a slew of factors may be conspiring to take it down further. The big risk is of the Fed hiking rates even though inflation is weak. That has historically been bad for gold, as any time rates move higher it weakens gold as its zero-rate return looks less favorable. Low inflation also reduces gold’s attractiveness as a hedge, meaning a hike during a low inflation period is essentially a double-whammy against gold. Finally, rate hikes would strengthen the Dollar, another factor that would hurt gold demand by making it more expensive for overseas buyers.

FINSUM: If Yellen and the Fed stick to their rhetoric, then gold looks set for some sure losses.

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